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March 22, 2010

I received an Unexpected 1099-R. What Should I do?


I received an Unexpected 1099-R. What Should I do?

Question I moved assets from my traditional IRA at Custodian A to my traditional IRA at Custodian B. I explicitly told Custodian A to send the funds directly to my traditional IRA at Custodian B when I completed the distribution request form. Should they have issued a 1099-R?


It appears so. The key statement in your question is “…when I completed the distribution request form”. Regardless of the instructions you provide on the form, your transaction is treated as a distribution and therefore reportable[1], because you completed a distribution request, instead of a request to complete a transfer. IRA Custodians usually provide separate forms for these transactions, and, in many cases, the distribution form will include a reminder that using it will result in the transaction being reported to the IRS.

What You Should Do

You have two options

1. Leave the transaction as is. In this case, you will need to follow up with Custodian B and ensure that they treat the receipt of the funds as a rollover contribution. A rollover contribution is reported on IRS Form 5498 and will serve to offset the distribution reported on the 1099-R. Your tax preparer will need to report the amount as a nontaxable distribution on your tax return. This is accomplished by following the instructions for reporting a rollover on line 15a on 1040 or line 11a on Form 1040-A.

Caution: This option is available only if you have not done a rollover of a distribution from a traditional IRA or Roth IRA within 12-months before the distribution being discussed was made.

2. Ask the Custodians of both traditional IRAs to treat the transaction as a transfer. They may be amenable to doing so, since you did not take possession of the funds. However, bear in mind that they are not obligated to honor your request. In fact, if you already completed a rollover contribution form with Custodian B, instructing them to treat the amount as a rollover contribution, they may be unwilling to make any adjustments as designating an amount as a rollover contribution is usually is usually an irrevocable designation. If they both agree to treat the transaction as a transfer, Custodian A will need to correct the 1099-R reporting, to ensure that the amount is not reported as a distribution, and – in this case, the amount would not be reported on your tax return.

For future reference, please ensure that the correct forms are completed for the transactions you request. Many IRA related errors occur when the wrong forms are completed.

[1] Required to be reported to you and the IRS on form 1099-R


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